A new financial shield for climate-exposed sectors
India’s First Weather Derivatives to Tackle Climate Uncertaint: yIndia is preparing to roll out its first-ever weather derivatives, a significant innovation in its climate risk management toolbox. This move is being led by the National Commodity and Derivatives Exchange Ltd (NCDEX) in partnership with the India Meteorological Department (IMD).
These financial instruments are designed to help farmers and agribusinesses mitigate losses from weather volatility, such as irregular rainfall, extreme heat, or unseasonal changes.
How the product will function
The weather derivatives will rely on historical and real-time data from IMD to create location-specific and season-based contracts. Each contract will be statistically backed, ensuring transparency and relevance for specific agro-climatic zones.
For example, if a farmer in Vidarbha faces a rainfall shortfall below a pre-agreed threshold, the derivative payout is automatically triggered.
What makes weather derivatives different
Unlike traditional derivatives linked to financial markets, weather derivatives use meteorological parameters like rainfall, temperature, or humidity as their underlying asset.
These are tied to a predefined weather index, often monitored by a neutral agency like IMD. Since weather does not have a tradeable market value, these are non-tradable and fall under incomplete markets.
Static GK fact: The first weather derivatives were introduced in the United States in the late 1990s, initially through over-the-counter (OTC) contracts.
Applications beyond agriculture
While farmers are the primary target, weather derivatives are also beneficial for power companies, insurance firms, and event organizers. For instance, electricity demand varies with temperature; power companies can hedge against revenue dips using temperature-indexed contracts.
Static GK Tip: In India, agriculture still employs over 45% of the population, and weather-related losses account for nearly 20% of annual crop damage.
Regulatory framework and future steps
For these products to succeed, regulatory clarity from SEBI and alignment with insurance and agricultural ministries is critical. NCDEX and IMD’s collaboration is just a first step; scalability will depend on awareness, accessibility, and legal enforcement.
Moreover, as climate change intensifies, the use of such tools may become an essential part of India’s broader climate resilience strategy.
Static Usthadian Current Affairs Table
India’s First Weather Derivatives to Tackle Climate Uncertaint:
| Topic | Detail |
| Launch Entity | National Commodity and Derivatives Exchange Ltd (NCDEX) |
| Data Partner | India Meteorological Department (IMD) |
| Product Type | Weather Derivatives |
| Parameters Used | Rainfall, Temperature |
| First Global Use | United States, 1990s |
| Application Sectors | Agriculture, Energy, Insurance, Events |
| Contract Basis | Location-specific, Seasonal, Index-linked |
| Market Type | Incomplete market (non-tradable asset) |
| Risk Covered | Rainfall deficit, Heatwaves, Unseasonal weather |
| Regulatory Body | Securities and Exchange Board of India (SEBI) |
